Mitsubishi Electric Earnings: Weak FA Systems Sales Hit Operating Income, but Midterm Outlook Intact

Mitsubishi Electric’s 6503 June-quarter factory automation systems orders fell 43% year on year, worsening from the 25% decline year on year in the March quarter, which we think caused the negative market reaction. While guidance suggests 4% segment sales growth for fiscal 2024 (ending March 2024), assuming an order recovery in the second fiscal half, we are not convinced this will be realized. With the weak investments in the semiconductor/digital and machine tool industries, we expect the inventory adjustment in the industry will continue for the rest of fiscal 2024. As such, we now project full-year FA systems sales to decline 13.5% year on year, down from a 7% decline previously; given the downward revision, we forecast this year’s operating income to be 26% below guidance. Nevertheless, our medium-term outlook is intact, as we expect a recovery in semiconductor/digital investments will improve operating income from next year onward; therefore, we maintain our fair value estimate at JPY 2,000. We believe the shares are fairly valued.

We think there will be significant hurdles in achieving management’s operating income target of JPY 330 billion, or 6.3% operating margin, mainly because we expect weaker capacity utilization from lower FA systems sales and the automobile equipment business to remain unprofitable. The automobile business has been unprofitable for three consecutive years as a result of low-margin gasoline vehicle products, investments in CASE (car, autonomous vehicle, sharing/subscription, and electrification) technologies, and operating inefficiencies like excess sales facilities in Japan. As these factors will remain this year, we project companywide operating income to be about JPY 250 billion, or 5.0% margin. However, we think the plan to start phasing out the unprofitable car multimedia business next year will turn the business profitable from fiscal 2025. We project operating income to increase to JPY 340 billion, or 6.5% margin, in fiscal 2025.